Losing your job is a worrying time and can cause a lot of stress, especially if the redundancy was unexpected. Financial worries seem to loom, and you wonder how you’re going to meet daily expenses without an income.
Most people live within their means, so if you were in a high-paying job you may have the lifestyle to go with it. Facing a job loss with a high mortgage and other financial commitments can be very unsettling, and it’s understandable to feel a little trepidation about the future.
Thankfully, many companies offer a substantial severance package, which gives you some time to find new employment or start a new career. The amount of money you receive will depend on how long you were with your company.
A general rule of thumb is that you will receive 1-2 weeks of pay for every year you have worked. However, the amount can often be more than this depending on customer policy and especially if the job loss will create severe economic instability. Those in higher ranking jobs will typically receive a greater payout.
Unfortunately, receiving a large sum of money means increased taxes. In 43 states of the USA taxes are taken off of severance pay and are also classed as additional or supplemental pay which is taxed even further, in fact employers are required by law to deduct 22% off wages and are held and paid to the IRS.
It’s worth trying to negotiate severance payments with employers to make the outcome better for you. For example, if you are on good terms with them and provide years of loyal service, they may be willing to add an amount to cover tax deductions.
So what can you do to minimize the amount of tax you need to pay and make the money go further?
Retirement Funds
Whatever your age, it’s always good to consider your future and put money away into a pension. If you have been working at your place of employment for many years, you may be used to paying a portion of your wages into a pension package.
This also comes with tax benefits. You can choose to make larger payments, or you could pay some severance pay into a personal tax-deferred pension pot. If you don’t have one, it’s easy to open one, and you can add $6000 a year or $7000 if you’re over 50.
If you pay into a pension with your employer such as a RRP they may allow you to put all the severance pay into the pension, but this option will only work if you have enough money to live on in the meantime.
Of course, you could always split it; some for the pension, some to live on. You will then only pay tax on the amount you take out. Furthermore, you must ensure you have enough contributions to allow you to transfer the severance pay.
It is also an option to structure the payments, so you pay in installments and only get taxed on it during that specific year.
529 Plans
This state-sponsored plan is designed to help support kids through college, and the government offers tax deductions on any contributions made. If you don’t already have one, it’s easy to open one.
Your money will grow tax deferred and can be withdrawn tax-free if it is spent on college fees. This includes expenses for educational purposes, K-12 tuition, apprenticeship costs and fees and higher education fees plus computer equipment and books.
There are limits, and each state differs in what they offer. For example in one state you are able to contribute uio ro $4,808 a year per person to the plan and will receive 5% state credit which saves $2-300 in tax.
Every state has a plan available, but you can use whatever state is offering the best plan at the time. Each plan offers a different portfolio. With an age-related plan it usually adjusts as the child grows.
It’s a pretty risk-free investment option and won’t be affected by the changes in the stock market. A static portfolio is based on assets and the plan generally remains the same.
It’s important to research fully what each plan offers as there are a lot of differences between them, especially when it comes to tax issues.
Health Insurance
Health insurance packages can be costly, but thankfully there are plans that offer substantial deductibles. The minimum deductible income fluctuates yearly, but it’s a great way to invest in long-term healthcare and avoiding tax from severance payments.
In addition, the higher the deductible the lower monthly premiums, so it’s win-win. The contribution limit for HSAs is $3,650 for individuals and $7,300 for families.
Payment Spread
If you are receiving a high severance package, it can push you into the higher tax bracket. This can drain a large portion of your payout, so a good way of avoiding this is to ask your employer if you can get paid in two separate tax years.
Most employers are happy to oblige, and you can discuss with them if you want payment over 2 or more years. Some may even agree to paying you each month the amount you earned as an employee up to the limit of your severance payment.
This reduces the tax burden as well as allowing you some breathing space whilst you find new employment or build a new business.
Life throws us some curveballs sometimes, and circumstances are never set in stone. Losing your job will certainly create a challenge. And it can be hard to know which way to turn and how to use what money you’re left with.
However, a positive attitude and some wise decisions can make some things turn out better than you imagine. It’s important to use negative situations such as a job loss as a way to learn and grow.
Some things are meant to be and maybe this is the beginning of a brand-new chapter and good things will result.
